Presently mortgages are issued by mortgage originators such as banks, savings and loans, etc. Homeowners apply for mortgages from the financial institution for the purchase of a housing unit. The mortgage is a loan from the mortgage originator which produces a principal return and an interest stream of income. Individual mortgages may be pooled and the interest stream from the mortgages may be bundled to create mortgage backed securities which may be sold by the mortgage originator. By obtaining favorable funding through pooling many individual mortgages, the mortgage originator may be able to offer competitive interest rates on mortgages for its customers.
Presently, mortgage originators have two choices with regard to issued mortgages. The institution can hold the mortgage in a portfolio or it can sell the mortgage for securitization. By holding the mortgage in a portfolio, the mortgage originator must hold the interest rate risk involved in mortgage portfolios. If interest rates increase, the mortgage originator risks incurring higher funding costs on the mortgages, the revenues from which are locked at a lower interest rate. Additionally, current regulatory capital requirements discourage portfolio lending since a mortgage originator must hold twice as much capital against a whole loan as it does against a mortgage backed security, thereby requiring twice the net return to achieve the same return on equity. Finally, a mortgage portfolio owner has an options risk since mortgagees may prepay the principal more rapidly then expected.
As an alternative to holding mortgages, most mortgage originators sell many of the mortgages they originate into the secondary market. In the process they pay a guarantee fee to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). The guarantee fee is paid by the mortgage originator to either Fannie Mae or Freddie Mac to take the credit risks associated with the mortgage. The guarantee fee is typically calculated as 20-25 basis points of the outstanding principal on the mortgage. The payment of the guarantee fees results in a lower capital requirement but provides a lower profit to the mortgage portfolio seller.
Many such mortgage originators obtain funds to finance the mortgage they own from a funding institution such as a Federal Home Loan Bank. These funds allow mortgage originators to extend mortgages to home buyers and retain the mortgage loan on their own balance sheets. The funding institution such as a Federal Home Loan Bank helps mortgage originators to manage the risk of falling interest rates by making long term advances to match the term of home loans or by providing interest rate swaps or other financial contracts to hedge the risk of such rates. However, due to intense competition for mortgage loans and the high cost of managing interest rates, the return on holding mortgage loans is often not acceptable. Mortgage origination institutions are very efficient at performing many of the tasks associated with originating mortgages, but not as efficient at managing the interest rate risk.
Therefore, a need exists for a system which enables a funding institution to manage the allocation of interest rate risk of mortgages between itself and a mortgage originator. Furthermore, a need exists for a system to allow a mortgage originator to transfer the necessary data affiliated with a mortgage loan to a funding institution. Also, a need exists for a system to generate reports on funding between a funding institution and a mortgage originator reflecting the allocation of risk.